SPECIAL REPORT - Breakneck reform pace overloads Myanmar

Employees work at the Myanmar central bank's headquarters in Naypyitaw May 17, 2012.
REUTERS/Soe Zeya Tun

By Jason Szep| NAYPYITAW, Myanmar

NAYPYITAW, Myanmar The desks are mostly empty. Two computers idle in a corner. A young woman in a sarong leafs through a newspaper. Welcome to what should be the fast-beating heart of Myanmar's economy: the headquarters of the central bank.

The first tour of the complex in the capital Naypyitaw by a foreign journalist reveals an almost lifeless institution. The Monetary Policy Department has just three computers, about the same as the Bank Supervision Department. A training department has fewer than five, including one being used for video games. Two children giggle in the corner.

"The staff shortage is not just a problem at the central bank but also at many other institutions in our country," said deputy central bank governor Nay Aye. "We also need help with technology." Underscoring the point, the building's power went out twice during the interview.

As Myanmar opens up after almost 50 years of army rule, and foreign investors descend on the resource-rich country of 60 million, its long-isolated institutions are struggling to keep up, raising the risk of a policy misstep that could wreck stability in this nascent democracy.

The pace of change, already frenetic, looks set to accelerate after President Thein Sein announced on June 19 a second phase of reforms. The goal: tripling the size of the economy in five years and modernising a backward state where 30 percent of the population live under the poverty line and three-quarters get by with no electricity.

A Reuters examination of the policymaking apparatus of the hitherto secretive government reveals how difficult that will be. Inexperienced and thinly staffed ministries are grappling with growing workloads and hastily training themselves in the ways of a world that Myanmar shunned for nearly half a century.

The former military junta isn't dragging its feet on economic reform. In fact, it is pushing ahead so fast that foreign advisers here on the ground say it risks overloading its rickety institutions.

TASTING FREEDOM

"They really aim to reform just about anything and everything at this stage," said Craig Steffensen, the Asian Development Bank's chief on Myanmar and Thailand. He said Myanmar officials want to do things right and are seeking the best advice. But "there is so much on their plate right now and so few people involved in evaluating all of this, that I think they're getting to the point where they are overwhelmed."

In less than a year, the government has drafted dozens of new bills, freed hundreds of political prisoners, legalised trade unions, signed peace deals with ethnic rebels, eased censorship, unshackled the political opposition, announced plans for a stock exchange, reformed its currency and held historic by-elections.

Its rewards - a suspension of U.S. and European sanctions, and a gold rush of foreign investors - have policymakers racing to overhaul an economy blighted by decades of failed socialist planning and military crony capitalism.

The world isn't simply watching. Multilateral agencies - the International Monetary Fund, the World Bank and the Asian Development Bank - are offering advice, but it is often conflicting, according to interviews with nearly a dozen senior officials.

But the most formidable pressure comes from a long-oppressed people impatient for change after years of isolation, poverty and oppression. They have tasted freedom for the first time since the army seized power in a 1962 coup - and they want more.

In recent weeks, Myanmar has seen ferment over a variety of issues: city dwellers protesting over chronic power outages, textile workers seeking better wages, farmers demanding land reform. Long-simmering tensions between minority Rohingya Muslims and majority Buddhists have flared into deadly violence.

Until last year, authorities would either usually respond with force or not respond at all. Today, that could cost them power. The landslide win by the opposition party of Nobel Peace laureate Aung San Suu Kyi in April by-elections sent an ominous signal to the military-backed ruling Union Solidarity and Development Party ahead of a 2015 general election.

FASTER, FASTER

The government, led by former generals, appears to recognize that the people want immediate improvement.

"If we reform very quickly, people will feel the tangible dividends of democracy," said Industry Minister Soe Thein, a former naval commander-in-chief and close confidant of President Thein Sein. "But if they get nothing, they'll feel the former government and the new government are the same. That is why we want to push reforms very quickly," he told Reuters.

That haste worries development agencies experienced in rebuilding troubled countries such as Myanmar, whose problems are magnified by its size. With an area as large as England and France combined, Myanmar is Southeast Asia's second-biggest country after Indonesia, strategically nestled between five nations, including rising powers India and China.

The ADB, World Bank and IMF re-engaged with Myanmar this year, a quarter-century after bloody crackdowns on democracy activists by the former junta ended their aid programs. But resuming work requires clearing hundreds of millions of dollars in unpaid debts to the ADB and other agencies, which could take a year or longer.

Since taking office in March 2011, the quasi-civilian government has passed 26 new laws, with another two dozen waiting to be approved by the attorney general's office, according to documents seen by Reuters. These often originate with the "President's Business Advisory Group," a coterie of about 20 cabinet ministers and private economists convened by Thein Sein about once a month, Industry Minister Soe Thein said.

Some development experts fear a serious policy mistake by the nation's undertrained and overworked technocrats might foment instability, which could then be exploited by opponents of reform to revive hardline rule.

Suu Kyi, now parliamentary opposition leader after 15 years under house arrest, alluded to the risks in a June 1 speech in Bangkok to business leaders, highlighting a weak judiciary and rule of law. "These days I'm coming across a lot of what I call reckless optimism," she said, urging Thein Sein's government to be more transparent about how laws were drafted.

SLOW MONEY

During two decades of sanctions, the central bank's role was simple: count the money.

Few people wrote cheques. Businessmen hauled sacks of cash to banks. Economic data collection was almost non-existent. And for 35 years, until April, the currency was fixed at a rate 100 times more valuable against the dollar than the black market rate, a system that flummoxed Myanmar's few foreign investors.

That's all changing. According to central bank officials, a new law will give the central bank independence from the Finance Ministry by early next year. The currency was floated on April 2 in one of Myanmar's biggest reforms to date. Nationwide debit cards are scheduled to be rolled out in July. International banking is planned next year, possibly sooner.

"There were challenges when I was a soldier, too," said Nay Aye, 56, one of the bank's two deputy governors and a former lieutenant colonel in Myanmar's still-powerful army.

In October 2010, Nay Aye helped move the central bank's headquarters from Yangon, the biggest city, to Naypyitaw, the capital built from scratch just seven years ago 320 kilometers (200 miles) to the north. The city is a maze of ministry buildings, government mansions, civil servants' quarters and presidential palaces - all rising from arid scrubland.

The bank is an imposing hilltop building surrounded by manicured lawns, jetting water fountains and a fence topped with razor wire. It overlooks the affluent homes of senior bureaucrats and, in the distance, farms where villagers plough with oxen and live in thatched-roof huts.

At the bank's Yangon branch, a daily foreign-exchange auction shows how far Myanmar has come - and the distance it has to go. In a small office, at 8:30 a.m. each day, officials from 11 banks sit in rows of classroom-style tablet-arm desks. They jot down their bids for the currency, the kyat, sealing them in envelopes. They then wait in a hallway.

The envelopes are opened by Muang Muang Aye, the central bank's other deputy governor, and a group of senior bankers. There are no glowing computer screens or teleconferences with advisers, just a large circular table with a telephone to check the rates in Yangon's still-thriving black markets. An IMF official usually observes. After a few minutes, Muang Muang Aye calls the bankers back to announce the day's exchange rate.

These rudimentary auctions are still a big advance on the previous currency-exchange system that was so arcane foreign investors saw it as an obstacle. Muang Muang Aye said he expects the system will become more sophisticated over time with the help of Japanese funding and hands-on training from Thailand's central bank and the IMF.

But, again, speed is vital. Foreign-exchange volumes are surging, from about $1 million a day in April to up to $10 million in May.

"MINDSETS MUST BE CHANGED"

Other officials are getting crash courses in governance. The Commerce Ministry launched its own school in April, the International Trade Institute, rotating about 60 staff through its classrooms each month. They start with the basics: international trade.

"Our president sent a very clear signal, not just to reform our country but to reform us - the ministries, the government staff," said Tint Thwin, the Commerce Ministry's deputy director general. "So now we are moving fast." His to-do list grows by the week - from drafting new consumer protection and trademark laws to advising multinational companies, forming trade strategies and overhauling how the ministry works.

Among his biggest concerns: a plan to create a European Union-style free-trade community by 2015 among the 10-nation Association of Southeast Asian Nations, which includes Myanmar - a grouping of 600 million people.

"That will open our market to everything: capital, labour, trade in goods, services," he said. "How do we protect our domestic industry? How do we protect our goods, which are not very good quality? We're not ready for that."

Nor is Myanmar's civilian bureaucracy. Army-ruled Myanmar shunned outside advice and had few technocrats. By contrast, Indonesia's former strongman Suharto presided over three decades of authoritarianism with the help of U.S.-educated Indonesian economists known as the "Berkeley mafia."

Paranoia ran deeper in Myanmar, where a strong bureaucracy was seen as a threat to the all-powerful State Peace and Development Council, a clique of 11 commanders led by retired dictator Than Shwe. Loyalty trumped skill.

But Myanmar's enfeebled civil service hopes to gain some muscle. Aspiring bureaucrats may soon face tests before joining a ministry "to know their qualities and skills" under the next wave of reforms, Vice President Sai Mauk Kham told cabinet ministers in a May 13 meeting in Naypyitaw, state media said.

"Those reforms must be initiated fast and mindsets must be changed," he said.

FADED CROWN JEWEL

Nowhere are the pressures on Myanmar more obvious than on the rutted sidewalks of Yangon, a crumbling monument to decades of misrule.

Its once-stunning colonial-era buildings are dilapidated reminders of a nearly forgotten past when Myanmar - then known as Burma - was one of Asia's wealthiest and most promising nations. In the early 20th century, Yangon was a British colonial crown jewel whose public services and infrastructure rivaled London's.

A walk amid the cluttered din of Yangon, along sidewalks stained with rust-red betel-nut spittle, reveals the strains facing the city of 6 million people: daily power outages, flooded streets, and long commutes in stifling-hot buses crammed so full of passengers that some hang from the sides.

Yangon needs a plan. Vietnam's bustling commercial capital shows why.

When U.S. sanctions were lifted in 1994, Ho Chi Minh City's population was about 4.7 million. Today, that's nearly doubled and the former Saigon's historic tree-lined boulevards are beset by grid-lock, pollution, motorbikes, trucks and accidents.

Yangon can avoid degenerating into another sprawling Asian mega-city "only if it prepares a plan before development threatens to overwhelm it," said a report by Harvard University's Ash Center, whose urban planners and economists have been commissioned to advise Myanmar's government. It said the city must also build affordable housing, strengthen its rail and bus systems, and prepare for a rise in automobile ownership - now out of reach for most people.

The $300-a-night Strand Hotel, opened in 1901 and refurbished in 1995, is an example of what many buildings could be, with marble floors, gentle ceiling fans and dark wood paneling. Many similar structures became vacant when the government moved the capital to Naypyitaw in 2005.

But the body responsible for a master plan, the Yangon City Development Committee, "had no trained planning staff and thus little experience or expertise to draw from," said the report, urging Singapore to help with a blueprint.

The IMF projects Myanmar's economy will expand by about 6 percent this fiscal year. Much of that growth will take place in Yangon, accelerating an influx of farm workers into the city as factories go up and potentially enlarging its slums, now home to about 10 percent of the city's population.

Already, many people scrape by close to the poverty line.

Noodle-seller Lay Phyu complains of 12-hour power cuts that disable the city's water pumps, forcing him to draw water by hand from a nearby well. "It's very hard," said the 19-year-old, who takes home 4,000 kyat a day. His voice is nearly drowned out by diesel generators powering nearby stores during an afternoon blackout.

"PRAY TO THE RAIN GOD"

A crumbling city could be ignored in the past, but that's harder as a long-oppressed people find their voice.

Anger over power outages erupted into protests in May in Yangon and two other cities, the biggest since a 2007 monk-led uprising that was violently suppressed. The government's response this time was marred by initial gaffes.

"If you want more electricity, please pray to the rain god," Aye Aye Min, chief electrical engineer of the city of Mandalay, told reporters when asked about the blackouts. Protesters were further enraged when a presidential adviser said people should "economise" as the Japanese did after last year's devastating tsunami.

But then the government demonstrated it was listening. State media showed officials promising more power supplies. Generators would be flown in under emergency measures.

The stakes, however, will soon be higher during a second phase of reforms. These could reshape the ministries and further open up a country that less than a century ago was the world's biggest rice exporter and rich in timber, gems and jade.

The president last week forecast economic growth of 7.7 percent a year between 2011 and 2016. But he suggested if the reforms are done quickly, the payoff will be even greater: The economy will triple in size over five years - a point emphasised in state media for several days. This would require stunning growth of 25 percent a year, a feat considered wildly unrealistic.

For now, investment is needed just about everywhere in government. The president acknowledged some ministries will need to borrow money from abroad.

BLUEPRINT 2.0

In one extraordinary illustration of the costs Myanmar faces, as much as $20 billion needs to be spent to just bring electricity to regions that now go without it, he said. That's equal to half of Myanmar's current annual economic output. To do that, a new energy policy must be adopted, the president added, targeting $2 billion in spending over 10 years.

That kind of money requires aggressive foreign investment. But officials interviewed by Reuters in three ministries, including Industry Minister Soe Thein, said very few multinational companies have committed to large-scale investment despite the deluge of executives visiting the country.

Notable U.S. exceptions include beverage giant Coca-Cola Co and conglomerate General Electric Co, which both plan to set up operations in Myanmar once they receive a license from Washington. But GE's Southeast Asian chief, Stuart Dean, acknowledges GE is "years away" from having a big presence here.

Soe Thein and other officials hope investments will come faster but concede better laws need to be put in place. "There are lots of meetings," he says. "We hope the investments will follow."

Some foreign executives, including a team from investment bank Standard Chartered, are impressed but not yet sold. "Myanmar is undoubtedly a country of rich potential, but fulfilling that potential will be another matter," Standard Chartered said in a recent report.

Policymakers are rushing to finish details of the new reform plan by the end of the July. The reforms will have a horizon of about three years, said a senior economic planning official. A draft will be circulated to civil-society groups, donors and multilateral institutions in July.

"Until now most of the strategies and policies have been ad-hoc. We need a good blueprint, a comprehensive plan," said Khin Maung Nyo, a senior research fellow at the Myanmar Development Resource Institute, a think tank that is helping draft the plan.

But speed is of the essence. State media are urging people to accept mistakes as a price for moving fast. "If we worry about failures," said an editorial in the New Light of Myanmar newspaper, "it will surely lead us to lethargy."

(Editing by Michael Williams)

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